Mortgage Rates Are Closing In On 7%, Signaling Risk Of House Price Declines

For much of last year you could get a 30-year mortgage at around a 3% rate. Now mortgage costs are closing in on 7%. That’s a dramatic change in the affordability of U.S. housing in a short space of time. Now house prices are starting to react with recent data seeing some of the biggest drops in prices in over a decade. However, it is early days, with house prices still generally up year-over-year.

Housing Affordability

Mortgage rates matter for many buyers since they determine what many buyers can afford. The median home sales price in August was $436,800 according to U.S. Census data.

That means that the monthly mortgage cost on that home has risen from approximately $1,000 to $2,5000 for new home buyers. Of course, not everyone buys homes with a mortgage, but many do, and so the affordability of home has reduced for many Americans in the space of just a year.

The Atlanta Fed tracks housing affordability here, and though the data is not updated for the most recent move up in rates, the trend is weak for 2022, returning to low levels of affordability not seen since 2007.

Although house prices have not fallen significantly at this point, there are many worrying early signs for the housing market, beyond affordability. Here are some of them.

Rising Inventory

Housing inventory in the U.S. appears to be rising fairly sharply. This is a problem because it implies, in part, that houses aren’t selling at current prices.

House prices can be sticky because sellers are often reluctant to cut prices, but rising inventory suggest that reduced house prices may be needed to match buyers and sellers. Rising inventory could signal that material price declines are on the way.

Falling Prices

Then house prices may be starting to fall. Zillow data saw the biggest monthly house price drop of 0.3% in July. That’s the biggest monthly house price fall in over a decade on Zillow’s numbers. Case-Shiller indices are also seeing early price declines. RedfinRDFN
is tracking similar trends, as well as noting more homes seeing price drop and less selling above the asking price.

Nonetheless, it’s early days, if house prices are set to weaken. Currently house prices remain up around 14% on a year-on-year basis. Further drops would be needed to see housing lose value on a year-over-year basis.

The Fed

The root cause here is primarily the Fed pushing up interest rates as they fight inflation. That in turn drives up mortgage costs.

The good news is that interest rates are forward looking, so the Fed’s likely plan to raise rates again in November and December is reflected in mortgage rates today, unless the Fed changes the script. Still, the market is less sure which way the Fed will move in 2023, and if more rate hikes are on the cards, that could push up interest rates and hence mortgage costs further.

The omens for housing do not look good currently. However, it’s also important to remember that the swings in the value of houses are often a lot more moderate than with other assets, such as stocks.

For example peak to trough during the Great Financial Crisis from Q1 2007 to Q1 2009, the median U.S. house price fell 19%. Furthermore, that’s an extreme move in the history of U.S. house prices. So there are signs that U.S. house prices may soften, but, the market for housing can be more stable than for many other financial markets.